What is the Headline Effect?

The headline effect can be termed a finance and investment principle that explains the impact of negative news headlines on the stock price of a business or overall economy. According to economists, public reactions to certain media coverage cause the consumer to refrain from spending money. As much a headline effect may be harmful to businesses, some companies use it to their advantage by crafting their own favorable message.

How Does the Headline Effect Work?

Whether there is an explanation or not, public reaction to negative headlines can blow things out of proportion compared to the positive news headline. So, any time there is a release of a negative economic report from a government agency or central bank, it is likely to react disproportionately. Investors, traders, and members of the investing public react to such news either by selling or converting funds so that they do away with the affected currency. Though reaction to market changes happens more often depending on the prevailing situation, the headline effect can make things look worse by speeding up the reaction. By bringing negative news to the mind of the public traders, it makes things to appear worse than they are.

Lets assume that there is a negative report given by the media about Company ABCs product. That negative headline creates risk for this company. Remember, the more the bad news catches the attention of the public, the more people will decline to purchase that particular product. Company ABC then becomes worthless, leading to a decrease in stock prices. The drop in the stock prices is as a result of the headline effect. Note that even if the news in the headline is not grave, they can still have an adverse effect on the price of the stock. However, the effects only last for a short time.

How to Mitigate Headline Effect

The reason why most companies invest in public relations (PR) is for those in the department to deal with the headline effects that may affect their operations. Most companies have the PR department to help point out to the media that what they said about their product is not true. In other words, they try to gain back public trust by giving assurance that their product is safe for use.

Headline Effect and Internet

Article titles and headlines in this era of the internet are very powerful. Internet contributes to the rapid dissemination of news, and given that we have so many social media platforms, the news headlines become repetitive. Repetition of information can be so influential, especially when millions of people receive the news through different social media.